Equity · Fundraising

What are the chances of getting a $600K investment for 10% equity stake in a pre revenue startup still in Beta?

Frank Terlep Founder & CEO @ Auto Techcelerators, LLC. building new mobile app and platform for auto industry

February 2nd, 2020

Management team is well known and experienced, one of a kind patent-pending SaaS, Mobile platform, Total Available Market in US = 298,000, 20% penetration = $64MM in annual recurring revenue and virtually every business this solution is targeted at performs this process manually today.

David M

February 5th, 2020

As for valuation and funding, that all depends on how solid your business plan is. I checked out the website. While I can imagine what your app might be utilized for you have no intended market. Test drives for dealerships? Test drives for product development? If it does what I am imagining it does, I would be targeting auto makers and and R&D departments as well. I would create an incentive program for anyone who walks into a dealership and takes a test drive and signs a release form for use of their test drive. Then I would market that back to big automakers to use as data to have more direct view of what drivers don't like. Example, I test drove a Ford F150 King Ranch not too long ago. My comments were "rougher ride than the dodge ram. Not as smooth as the 2017 King Ranch. Louder than the dodge." If you get 10,000 comments from test drivers like that, that data can be cross referenced with sales. If I knew investors and I sent them to your current website, they will say "This reads like a someone with a potentially great product, but a science and numbers guy tried to be a business development marketing guy and create a website...and that is why it is not very clear. He needs to get a marketing guy or creative strategy guy to work with to pull that brilliance out and make sure people understand it."

David M

February 5th, 2020

Do away with "one of a kind" regardless if you believe it is because that screams "not really one of a kind but we are saying this because we are trying to distract you from the fact there are several very similar products." I can't follow the incomplete sentence structure so I can't tell whether you are stating you only need 20% market penetration...if so that will scare most investors away. If you walk into any investor and claim you will capture 20% of the market you will get laughed out of the room and asked never to come back regardless if you actually can. The optics on that approach are naive and terrible. The better route is to show a solid marketing plan and what you need to do to achieve scaled milestones. If you reach 20% in the first year or 5th great...you can tell everyone who doubted "I told you so." But if your "experienced team" is letting you pitch this way, they aren't very experienced with raising funds. my 2 cents.

David M

February 12th, 2020

Paul your points and sentiment about wanting more than 10% are legit. One of the biggest pet peeves I see with first time entrepreneurs, especially ones I have come across on Co-Founders is their naivety and greed in the process. They just don't "get it." They want their cake and to eat it too. With that, 80% is a stretch, and a pretty big one. If I were in Franks place and some investor came back with 80%, two things would happen...one I would say they are out their mind...because they would be. And two, I would walk out the door simply because that investor has tilted greed in their direction considerably and that is the wrong investor you want backing you. A good investor will want a fair deal that leans in his favor, but also generously and genuinely want the entrepreneur to succeed. The route around ALL of this, is that at this stage too many entrepreneurs also focus with laser focus on %'s. This is a forum so better to test out ideas here than burn them in actual meetings. And you at least in part share my sentiment that the ask based on projected sales, regardless if possible, will turn off a lot of legit experienced investors.

As for your market penetration analysis, it is impossible to, as you do, place a set formula on what is doable and what is not doable without seeing a full scale marketing plan and business plan. Its just not, and to err on the side of cautious for an entrepreneur is wise…to err on the side of pessimistic and negative is the biggest killer of great ideas and great startups. You simply cannot apply a timeframe with as little information as you have. You are doing the kind of negative speculation that destroyed those shorting Tesla stock and made those of us who saw the bigger picture a nice chunk of change.

Regarding features. If they don’t care about features, you are failing with product design and marketing. If you are dealing with a CEO and you are telling them your product is 3x faster than his current one and he passes, then you are not showing him how 3x faster translates to lower overhead and higher profit margins..which if it does not…you have a product that is 3x faster but 4x less quality and less profitable. The only people who don’t jump on implementation of newer, better, and faster are low level lazy executives who are riding a pension and a paycheck, and no serious entrepreneur should be dealing with anyone but the head decision maker if he/she wants results.

Pedro Sostre Marketing Pro. CEO @ WebLift. Founder @ Black Helmet (acquired). Author, Web Analytics @forDummies

February 3rd, 2020

Pre-revenue valuations are fairly subjective. With that said, a $6M valuation is pretty high.

Do you have any traction or LOIs? Do the founders have previous exits? If you need 20% of your TAM to get to $64M in revenue, your market might not be big enough.

In general, it's possible, but there are lots of other variables that need to be considered.

Peter Achutha Alternative Thinking

February 14th, 2020

David M,

You are correct. Many years ago I developed a stock market game under DOS. When I showed it around people loved the game. Then I met an old 'friend' who said he could fund the marketing and sales of the game but he needed to test the game first. He said he wanted 70% of the company if not he would not fund the game. I refused to give him 70% control over the company but he took a copy of the game for testing. After one year of testing by his son he had not finished testing the game. So do be careful with very greedy dog in the manger people.

Paul Garcia marketing exec & business advisor

February 8th, 2020

I currently work for a SaaS company where nearly every business in our industry performs the task manually that our software performs 3x faster. Because the conversion from manual to streamlined is not about the features and benefits of your (or my) product, it's about change management (being willing to alter a process that still works, even if slower), it's more likely that you'll get those $1100 contracts at a rate where it will take you several decades to reach 20% market penetration. Some of the best companies have at max 15%. Not only will your sales cycle likely be 6-9 months from awareness to decision, the risk is still in whether you can persuade them to change their process. They don't care about your features, not really. And if your prospects aren't feeling any direct financial pressure to do more with less, then there is almost no incentive to change from their established manual process.

I'm just not seeing the risk as reasonable for only 10%. Pre-revenue, you'd have to give me more like 80% because I'd be taking nearly all the risk. Also, without knowing how you're spending your requested money or what you've put in from your own pocket so far, I can't guess whether it's a safe bet on that basis either. I'm at a minimum going to want the same deal you got with your own pocket money. So if you put in $500K and you own 100% of the company so far, I'm going to want to own more than you when I put in more than you did. Sweat equity counts for surprisingly little until you're generating revenue.

Frank Terlep Founder & CEO @ Auto Techcelerators, LLC. building new mobile app and platform for auto industry

February 5th, 2020

Pedro and David, thank you for your feedback. Truly appreciated.

Edward de Jong Software designer and developer, programming language designer

Last updated on February 12th, 2020

I have a very wealthy friend who has run dozens of companies. If he doesn't know much about the firm, he values it at 5 times the annual revenue. Since you don't have any revenue yet, a conservative investor will not give $6k much less $600k, because they don't do that kind of speculative thing. You are in the realm of venture capital, and depending on the market type, 600k may too small of an investment to garner much interest from a VC firm. And 600k is a lot for an angel investor for an unproven product. For example, it can cost around 2 million dollars to bring a drug to market. But they are worth hundreds of millions if they work well. In the automotive sector, 600k won't get you into the wheel business. Now for an app, 600K is a lot of money. Maybe you have some reason why you are burning that kind of cash, as most apps are pretty simple. Total available market is a fairly meaningless concept in apps. Does the app do something useful? How easy will it be to get new customers for the app?

Patents are very tough to get nowadays for software products. It's good that you have applied, but even if you got one - and that is getting tougher by the day - the usual problem in apps is not being copied, but figuring it out how to sell it. The noise level in the App stores is intense; there are millions of apps now, and you have to drive people to your app; they won't be able to find it.